Australia is about to be showered with good economic numbers as we approach the 2010 pre-election budget. But there are clearly serious problems ahead and last night on Wall Street we saw the market take fright, with the S&P down around 2.4 per cent at the time of writing. And unfortunately we have taken steps on the local front in our resource slug and interest rate hikes that did not take into account the overseas storm clouds.
In recent weeks every time the US market dipped, traders would move in and make a nice short-term killing. Last night some moved in, but the mood was uglier. Instead they began to take out put options on the market.
Here at Business Spectator we have been warning for weeks now that the European sovereign risk was dangerous but American markets believed it would be overcome. In addition American stock markets have priced in a strong US domestic recovery. The reason why markets are so jittery about sovereign debt is because so many of the world's largest banks have loaned significant sums to problem countries.
Last night, Berlin reminded me of New York in 2008. Back then, Americans were saying that it was those 'dreadful Wall Street gamblers that got us into this mess so why should we bail them out?' And so Lehman was left to fail and we found that the world financial system teetered on the brink because banks ceased to trust each other’s solvency.
But for Australia the most important action is in China, where there have been warning signs that the slowdown measures are being intensified. (Don't bet the house on China). Metals like copper were hammered last night on fears that the China slow down would change demand and you can expect that to flow into Australia. Today the Shanghai share index will be very important. If it shows another major fall then that will really frighten metal traders who have been borrowing cheap US dollars to punt on the market.
Strangely this action overseas comes just as Australia is shooting itself in the foot with the resources tax and higher interest rates. On the interest rate front, last February Matthew Quinn, CEO of one of our largest housing developers, Stockland, said that the dwelling market would start to be affected once interest rates went beyond 4.25 per cent. They have now risen to 4.5 per cent so get ready for all sorts of adverse consumer reactions, many of which will surprise us.
It’s not so much the additional quarter per cent interest rate increase but the fear of further rate rises that will dent the confidence of consumers. And the share price falls will compound the nervousness. But houses will not collapse in price because of the continuing shortages which, if anything, will be increased, because the higher rates will make it harder for developers to justify a case for more banking finance.
On the resources tax, BHP and to a lesser extent Rio Tinto are the backbone of Australian share portfolios. The government savaged them. Just as dangerous, they classified foreign investors as bad people and worthy of being hit hard. Foreign investors are going to be required for so many projects. They will now be much more wary and that nervousness will be multiplied by the fall on Wall Street.
So what we have is a world that is showing signs of stress at a time when Australia has moved into dangerous interest rate territory and has decided to decimate its own stock market by attacking foreign investors and its growth sector, resources. It's not smart.
source; Robert Gottliebson (Business Spectator)
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